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When is a seller entitled to keep the earnest money deposit if buyer backs out of the deal

Cupertino, CA |

This is a question regarding the rights of the parties in a real estate sale of a single family home located in Cupertino, California. In this case the parties signed a binding purchase contract (CAR) on a Friday, October 3,2008. The purchase contract stated that the buyer deposit an earnest money deposit of $36,000 with the escrow holder (item 2A, pg. 1) no later than Monday, October 6, 2008. The contract allowed 10 days for removal of inspections contingencies, and 21 days for all loan contingencies. The buyer notified the seller on Sunday, October 5, 2008 that they were cancelling he contract. Question: Is the seller entitled to keep any portion of the earnest money deposit?

Attorney Answers 2


  1. Generally, if 10/6 was just the deadline to put earnest money, the seller would be entitled to keep the earnest money since it acts as consideration for the seller to not enter into another agreement with another potential buyer. Practically speaking, if the seller hasn't deposited money into escrow already, you may have difficulty collecting and enforcing this agreement, and it may end up being more trouble than it is worth. You should consult with an attorney who can look at the signed contract and get some additional information in order to receive more comprehensive answer.


  2. Probably not. The CAR form makes it very difficult for a seller to receive (through escrow) or keep (if held by the listing broker/seller's agent) a buyer's deposit unless and until the buyer has actively removed all contingencies and thereafter failed to timely close escrow. See paragraph 14 of the contract which provides for the continuation of the buyer's contingencies, even after the stated time limits, and requires the seller to give the buyer a 24 hour "Notice to Buyer to Perform" as a precondition of cancelling the escrow. If the buyer doesn't timely remove the contingencies after receipt of the notice, then the seller may "cancel this Agreement in writing and authorize return of Buyer's deposit..." In my experience, many real estate practitioners are unaware of this provision.

    The reason for the qualified "probably not" is two fold. First, an answer must always be qualified where limited background facts are known. Here, it is not clear who is holding the deposit, whether the liquidated damages clause was initialed, and whether the seller had any actual damages as a result of the cancellation. Second, if the buyer's reasons for cancelation have nothing to do with any of the contingencies, the seller may claim that the buyer has breached the implied covenant of good faith and fair dealing and assert entitlement to the deposit for that breach. As a practical matter, it is very difficult for a seller to prove that the buyer cancelled in bad faith and not for some legitimate reason.

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